Morgan Stanley to Pay $5 Million for Failing to Disclose SMA Execution Costs
The Securities and Exchange Commission cracked another disclosure whip on Tuesday, saying that Morgan Stanley Smith Barney agreed to pay a $5 million penalty for misleading retail clients about trade execution costs in certain wrap fee advisory programs.
The trading-away activity, which occurred for almost five years ending in June 2017, led some clients to pay “transaction-based charges that were not visible to them,” the SEC said.
Morgan Stanley also failed to detect that some clients paid transaction charges for orders sent by SMA managers to the firm’s own brokerage affiliates in violation of its policies, according to the settlement order.
The disclosure issues violated two sections of the Investment Advisers Act —Section 206(2) prohibiting practices that operate as a fraud or deceit to clients and prospects, and Section 206(4) requiring registered investment advisers to properly supervise through adoption of written policies and procedures, the SEC said.
“We are pleased to have resolved this matter and have corrected these historical issues,” a Morgan Stanley spokeswoman said in an e-mailed statement.
In assessing sanctions, which include a censure and payment of the $5 million that the SEC will distribute to harmed investors, the regulator noted remedial steps that Morgan Stanley has taken.
They include upgraded Form ADV and client agreement disclosures about trading away costs, better reporting to the firm from wrap managers about the dollar-weighted percentage of trades made outside the firm and enhanced website and account statement information about step-out trades and their costs.
As is typical of such consent orders that are negotiated to help the SEC control litigation costs and firms to avoid investor lawsuits, Morgan Stanley reached the settlement without admitting or denying the findings.